MCWG Update to WMS Loretta Martin LCRA, Chair Josephine Wan AE, Vice Chair 03/05/2014 1

MCWG Update to WMS General Update - February 20 th Joint MCWG/CWG Meeting Reviewed NPRRs for their credit impact All operational without any credit impact except – NPRR 598 – Clarify Inputs to PRC and ORDC - CWG/MCWG has reviewed the NPRR and filed the following comments: » “The Credit Working Group (CWG) has reviewed Nodal Protocol Revision Request (NPRR) 598 and feels that Operating Reserve Demand Curve (ORDC) was designed to increase the likelihood of high prices resulting in increased credit risk in the market”. 2

MCWG Update to WMS -Draft NPRR – M1 Revision ERCOT proposes to replace the fixed value for M1 with a calculation that will be specific to each Counter-Party to reflect CPs market risk profile. - Decompose M1 into two components: » M1a - Time period required to cover any terminated event; applicable to all entities » M1b - Time period to cover Mass Transitions only; applicable only to Counterparties-Parties with Load. M1b will adjust the mass transition days to reflect the decline in the potential exposure during the transition period * Note: M1 is the forward risk multiplier for DALE (day-ahead exposure) and RTLE (real-time exposure) - Next Steps: Draft NPRR will go through stakeholder process. In addition, ERCOT mentioned that in the M1 calculation there is a discount factor (DF) that applies to M1b if the Counter-Party meets ERCOT creditworthiness standards. Initial value is set at 0. DF will be further discussed at a later time. 3

MCWG Update to WMS -Discussion of correlation between load and prices In order to understand if forward credit exposure can be reliably estimated, ERCOT did additional analysis in the relationship between Real Time Settlement Point Prices (RTSPPs) and Load. » ERCOT created different buckets of hourly load with respect to percentage of monthly maximum load, and to better analyze tail prices, they used base log price “e” of RTSPP to including or excluding ORDC Adder » Two scenarios run by ERCOT: 1) Grouped by Load Zone, Load Bucket, Operating Month and log price to include/exclude ORDC Adder 2) Grouped by Load Zone, Load Bucket, Operating Hour and log price to include/exclude ORDC Adder Scenarios 1 - correlations are low across the board and hence no detailed analysis was performed. Scenarios 2 – improved hourly correlations are observed. For certain combinations of load zone a and operating hour; significant correlations are observed. - CWG/MCWG provided the following comments to ERCOT: » ERCOT needs to develop a methodology that can reliably estimate the collateral requirement to mitigate forward price risk. - Next Step To better estimate the forward price risk, the group requested ERCOT to run additional scenarios such as also look into the percentage of an forced outage that can trigger a high price event.

MCWG Update to WMS -New NPRR Settlement Point based Real Time and Day Ahead Market Exposure ERCOT uses historical look-back pricing rather than forward looking pricing to estimate the credit exposure, and collateral requirement during a high price event in summer and winter. The group requested ERCOT to do some impact analysis to see if including some degree of seasonality with a forward bias can better shape and improve credit exposure calculation for price risk. » Next Step – This matter will be further discussed in the future meetings. -Review Credit Insurance » Policies cover only receivable amounts (invoice amount), not exposures CWG/MCWG made the following comment to ERCOT: »Where will ERCOT find funding to purchase this policy? »ERCOT needs to do some cost and benefit analysis for purchasing this policy, and if there is a need to hire a consulting firm. -Next Step This matter will be further discussed in the next meeting. 5

MCWG Update to WMS -Review Flexible Account/Pre-Pay Process In the current Nodal market, ERCOT maintains the cash deposit by market participant in two separate accounts: » Prepay Account - used to pay or receive ERCOT invoices and/or to fund collateral account; no interest accrues. » Cash Collateral Account - may use for CRR, Day Ahead and Real-Time activity; with interest accrued. - ERCOT proposes to change the "Prepay Account" to "Flexible Account" to provide flexible payment options. Reduces the number of wire transfers and fees expenses. Next Step - ERCOT to draft NPRR. This matter will be further discussed in the next meeting before ERCOT presents this topic to Finance and Audit Committee to seek direction. -Discuss Financial Statement Requirements ERCOT presented the group some new financial statement provisions for new Counter- Parties entering the ERCOT market. (This is related to Protocol Section Monitoring of a Counter-Party's Creditworthiness and Credit Exposure by ERCOT as related to the financial statement requirement) -Next Step ERCOT to draft NPRR; market participants can provide any feedback to ERCOT directly. 6

MCWG Update to WMS -Review Day Ahead Market (DAM) Collateral Parameters Process including: Price Percentile, eFactors, RT-DA spread (currently 90%), PTP Obligation Discount (currently 90%) Nodal Protocol Section requires Day Ahead Market (DAM) Requirement Parameters to be reviewed at least annually. » The group requested ERCOT to provide some data in the next meeting to look at credit consumed and collateral level for the Energy Bids, Offers and Three-Parts Offers with the current DAM parameters percentile and eFactors parameters set in the Day Ahead Market. ERCOT also plans to provide an update to the group in the next meeting for the CRR Balancing Short-Paid Account for the PTP Obligation Discount discussion. Next Step – This topic will be discussed in more detail at the next meeting. 7